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Economist: Reverse Mortages Unfair
Reverse mortgages may not be popular in T&T, but they are on the rise. Director for the Division of Ageing Dr Jennifer Rouse has confirmed that more of the country’s seniors are latching on to the reverse mortgage. However, economist Dr Dhanayshar Mahabir insists that the reverse mortgage is heavily skewed in favour of mortgage companies and banks.
His advice to the elderly—sell your house and avoid getting roped into pitfalls. After a person has built-up equity in their home over the years, a reverse mortgage allows you to convert that equity into cash or a line of credit from a financial institution.
The lender pays the homeowner, and the reverse mortgage balance rises as a result, accruing interest and fees. The lenders get repaid when the owner either moves or dies, and the home is sold. The amount someone borrows depends on their age and the amount of equity in their home.
Three payments options are offered, a fixed monthly payment, lump sum or a combination of both. The reverse mortgage was first introduced in Trinidad and Tobago in 2002 by Home Mortgage Bank (HMB), the only institution locally that offers this programme.
A giant piggy bank
However, reverse mortgages have gone mainstream across the world, mainly in the US, and is no longer sold as something for seniors who are house rich and cash poor and need money to make ends meet. Today, they are marketed as a way for homeowners 62 or older to crack open a giant piggy bank.
A 2010 report from mnbc.com headlined Reverse Mortgage Can Lead To Trouble stated that the market for reverse mortgages had more than doubled from 2005 to 2008. In 2009, more than 100,000 seniors took out these loans. Likewise in T&T, Rouse admitted that the reverse mortgage “is catching on.”
Rouse said the reverse mortgage has been gaining momentum as more senior citizens, in particular women, are gravitating toward the service. “It is the elderly’s fundamental right. It is not to say that the bank has a gun to your head. It is you who called or approached them.” What has been attracting the interest of senior citizens was the widespread advertising on cable television, Rouse said.
“The advertisements tell you let your home pay for your care.” Rouse explained that the reverse mortgage first targeted single homeowners who had no dependents, but now elderly couples are getting roped into the trend. Any bank that offers a reverse mortgage, Mahabir said, should have some links with the insurance industry to calculate the expected life of the homeowner.
The government, Mahabir said, was duty-bound to look at the practice in order to regulate how institutions operate. “They must have the insurance companies fair accrual values. They must be able to have clauses where someone can revise the value of their house on a periodic basis.”
Mahabir said while the banks revise their interest rates at which they lend, people should be able to revise the house values periodically also for equity and fairness. The best thing for the homeowner to do was sell their property on the open market, Mahabir said.
The money collected should be invested in an institution. “When an individual has no one to leave his/her home to, they do not have to worry about capital preservation, so they can live off the interest earning, together with some of the earnings they got from their home.”
At the end of his life, Mahabir said, the homeowner would stand a better chance of having a surplus if he dies a year after he gets into an agreement. “With reverse mortgage, once you are locked in on the day of retirement you are locked for life. The people who are giving you the cash for your house benefits not the property owner.” Mahabir said while some of the monthly payments might look attractive, the better thing to do was sell your property.
If the market is depressed, he suggested that the homeowner rent out a portion of his house, keep their title and wait until the market improves. “I don’t like the reverse mortgage at all. I think they are unfair.” Mahabir said when the pensioner dies, the banks ends up holding a stock of homes in their portfolio, which they will sell. “So they are able to get $3 million for a $1 million house. So they make profits on the house and the financing.”
Benn—It’s attractive to the unsuspecting
Former UTT chairman Clarry Benn, who is now a private financial adviser, said people apply for a reverse mortgage because of circumstances. He said while it has been recommended to participate in such a service, in other instances, it was not necessary. “Each case will be judged on its own merit.” Benn said a reverse mortgage appears to be particularly attractive to the unsuspecting.
“It would be attractive due to the huge amount of instant cash available.” Benn said if someone owns a property and was in urgent need of cash, a reverse mortgage can be useful. “But by and large, whoever is providing the facility will condition it typically in such a way, that whatever the eventuality that may occur in the future, they certainly will not lose.” Benn said anyone who engages in a reverse mortgage ought to be careful because the person can lose their property.
Ali—A financial instrument
Managing director of Bankers Insurance Billy Ali said any bank offering reverse mortgage must have financial, tax, legal and actuarial inputs. Ali said the only way one can calculate the life expectancy of someone was based on a actuarial life expectancy table.
Ali agreed with Mahabir that government should look at the practice of institutions to regulate how they operate. “It should be regulated by the Central Bank.” A reverse mortgage, Ali said, is just another financial instrument that anyone can access based on one’s personal situation.
“Not all financial instruments will fit the needs of everybody. A reverse mortgage will be good for the person who finds themselves in a financial bind and has no other option but to go for that.” Several attempts for an interview with acting CEO of HMB Rawle Ramlogan proved futile.
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